What Is Forex Trading?
The forex (FX, foreign exchange) market works through international financial institutions such as banks, and it operates on different levels. In the background, the banks turn to a smaller of financial firms known as dealers, who are actively involved in large quantities of forex trading. Most forex trade dealers are banks, so this background market is also known as the interbank market.
The forex trades between forex dealers can be very large, involving millions of dollars. The forex market helps in the international trade and investment by enabling cross currency conversions. For example, it permits a business in the United Kingdom to import goods from the European Union member states, especially European members, and pay Euros, even though its income is in British Pounds. Plus, it supports the direct speculation in the value of different currencies, and helps in trades involving speculation based on the interest rate differential between cross currencies.
Once you have selected forex brokers (XM), you can open a free accounts and start trading with as little as 5 $/€/£ and watch how your money grows. We recommend you first practice using the demo account before you start trading with real money. Remember practice makes perfect.
The Forex Market
The forex market works through international financial institutions such as banks, and it operates on several levels. In the background, the banks turn to a smaller of financial firms known as “dealers,” who are actively involved in large quantities of foreign exchange trading. Most forex dealers are banks, so this background market is also known as the interbank market. The trades between forex dealers can be very large, involving millions and millions of dollars.
Advantages of Forex Trading
The forex market helps in the international trade and investment by enabling cross currency conversions. For example, it permits a business in the United Kingdom to import goods from the European Union member states, especially European members, and pay Euros, even though its income is in British Pounds.
Plus, it supports the direct speculation in the value of different currencies and helps in trades involving speculation based on the interest rate differential between cross currencies.
Forex Trade History
In forex transactions, a party purchases some quantity of one currency by paying some quantity of another currency. The modern forex market began forming during the 1970s after three decades of government restrictions on forex transactions, (the Bretton Woods system of monetary management established the rules for commercial and financial relations among the world's major countries and currencies), when countries gradually switched to floating exchange rates, which remained fixed as per the Bretton Woods system.
Forex Characteristics
Spot Trade:
Spot trade contracts are 2-day delivery transactions (except for US Dollar, Canadian Dollar, Turkish Lira, Euro and Russian Rubble, which is 1-day transactions), as opposed to the futures contracts, where the contracts are normally 3 months. This type of trade represents a direct exchange between 2 currencies, and has the shortest time to expire, real cash is traded rather than a contract; and interest is not included in the transaction.
Forward Trade:
Forward trade contracts are a good way to hedge forex volatility risk. One way to deal with the forex risk is to engage in a forward transaction contract. In this transaction contract, money does not really change hands until future expiration date. A buyer and seller agree on an exchange rate for any date in the future, and the transaction occurs on that date in the future, regardless of what the market rates are in the future. The trade contract can be for few days, months or years. Then the forward contract is negotiated and agreed upon by both parties, the contract becomes locked.
Swap Trade:
The most famous type of forward transaction is the forex swap contract. In a swap contract, 2 parties exchange currencies for a certain length of time in the future and agree to reverse the transaction at a future date. These are not standardised contracts and are not traded through an exchange, but rather private transactions. A deposit is normally required to hold the position open until the transaction is completed at a future expiration date.
Futures Trade:
Futures trade contracts are standardised forward contracts and are normally traded on the foreign exchange market. This type of contracts have an average length of 3 months. Futures contracts are normally include any interest amounts. Futures trade contracts specify a standard volume of a particular currency to be exchanged on a specific settlement date in the future agreed at present time.